More pain in store for Baoshang Bank investors as seized lender looks unlikely to service bond interest payment in full

Yujing Liu

Baoshang Bank, the first lender seized by Chinese regulators in two decades, could inflict further pain on investors as doubts remain on its ability to pay interest on its bonds, which could in turn lead to higher funding costs for struggling banks, analysts say.

The Inner Mongolia-based lender may not pay in full the annual interest on its 6.5 billion yuan (US$1 billion) tier two capital bonds due on December 28, credit rating agency S&P Global Ratings said in a note published on Thursday.

Creditors could also take a mild haircut of around 10 per cent of the principal if their wholesale obligations exceed 50 million yuan in the bond maturing in 2025, according to the report.

Regulators could restructure the subordinated bond as they did with the bank’s senior wholesale debt in May, which will increase the credit premiums for similar instruments issued by other banks and widen the credit divergence between strong and struggling banks, the report said.

Could seizure of Baoshang Bank lead to consolidation among China’s smaller banks with assets worth US$9.9 trillion?

“Investors of the bank’s tier-2 capital bonds still face the possibility of less than full payment in December, the next interest due date post the takeover,” said Nicholas Zhu, senior credit officer at rating agency Moody’s Investors Service.

The bonds were issued in December 2015 with a conventional five-year non-call option and a write-down provision, he said.

The decision could be “a bellwether event” for China’s reforms in the banking sector, where regulators are trying to let the market forces play a bigger role – by gradually removing the perception that the government will always bail out any repayment failures by banks – and at the same time maintain financial stability, S&P analysts said.

“Baoshang Bank’s upcoming interest-payment date will provide insights into the pace of sector-wide banking reforms that have in recent years instilled more market discipline in China,” said S&P Global Ratings credit analyst Harry Hu.

China to become more selective in supporting distressed banks, say Moody’s and Fitch

The one-year seizure of Baoshang Bank has sent shock waves across China’s 95 trillion yuan bond market. The market is worried about the health of thousands of small banks in the country, even as the China Banking and Insurance Regulatory Commission has stressed that the takeover is an individual case and that it does not intend to do the same to more banks.

The jittery sentiment is evident in the spate of recent runs on bank across the country. In late October, police arrested a woman in Henan province for spreading rumour that local lender Yichuan Rural Commercial Bank was going bust.

The rumour triggered “concentrated cash withdrawals” at the bank’s branches, police said. A similar incident took place at Yingkou Coastal Bank based in the northern province of Liaoning last week, resulting in the arrest of nine people.

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